Creating Wealth (New Society Publishers, 2011) co-written by Gwendolyn Hallsmith & Bernard Lietaer demonstrates how using creative initiatives such as time banks, systems of barter and exchange and local currencies, cities and towns can empower themselves and build vibrant, healthy, sustainable local economies.
"The reason saving comes before investing is that you need to have seed before you can sow it in anticipation of a harvest." -Rajen Devadason
Neo-feudal Housing: The New Lords and Serfs
Home ownership has been one of the cornerstones of the American dream for almost a century. As early as in the 1920s, Better Homes in America, Inc. worked with the Department of Commerce to promote housing as an economic development strategy, knowing that the construction of homes would provide jobs and other multiplied economic benefits.
It wasn’t until 1939 that the largest housing subsidy in US history was invented — the deduction on income taxes for the interest paid on mortgages. This, combined with federal mortgage insurance, the GI Bill for soldiers coming home from World War II and the mass production of automobiles, has shaped the ways in which our housing has developed ever since. Our homes are often our only source of equity — a cornerstone of the wealth we are able to accumulate in hope of securing a comfortable life.
In 2008, this clever combination of strategies — housing construction that creates jobs, mortgages that produce interest for the financial system and home ownership as a way to build wealth — collapsed on themselves and brought the rest of the financial system with them, creating the largest economic crisis in the US since the Great Depression. The genesis of the sub-prime crisis of 2008 illuminates the problems at the root of the financial system, but also points to a way forward out of the mess.
Every person who buys a home in the United States triggers the creation of money. We go to the bank and apply for a mortgage. When we do this, some people imagine that the bank has the money to lend to us from the savings of other people. It’s just a matter of making an application to get them to unlock the vault and hand out the money that’s stored there. Not so. The banks are allowed to lend money based on the fractional reserve system, which means that they are only required to have 10% of the money they loan out in reserve. When you agree to take a mortgage for $100,000, the bank therefore needs to have only about $10,000 of that on hand. They give you a check for the mortgage, which is then deposited in another bank, freeing the next bank up to provide loans for up to 90% of that deposit, and on and on it goes.
When banks were deregulated and allowed to start giving mortgages to people who they knew would be unable to keep up with the mortgage payments over the long term, a LOT of money was created. But the money was only as valuable as the promises to repay the debt; once it became obvious that a lot of the mortgages were not going to be repaid, the whole system came crashing down like a house of cards.
The financial designers were clever — they packaged all of these mortgage notes into derivatives and sold big packages of derivatives in products with different risk levels. The built-in assumptions were that real estate would continue to go up in value and that all these mortgage notes would be paid back. When real estate started to decline and people started to default on their mortgages, suddenly no one wanted to touch all of the mortgage-backed financial instruments in circulation. The result was that the real market value of all these derivatives could not be determined. With $1.2 trillion in circulation, it was hard for the bankers to know who had the worthless ones. This uncertainty undermined the banks’ trust in each other — they couldn’t tell which banks or finance houses would be liable to fail, so overnight the credit market evaporated. Banks wouldn’t even lend to each other overnight, a standard practice until that moment.
The money in the system that was created by all these suddenly worthless pieces of paper disappeared even faster than it appeared in the first place. The wreckage this has caused is staggering — in 2006, there were 268,532 people who lost their homes to foreclosure, in 2007 that number grew to 405,000.1 During 2008, more than 1,000,000 people lost their homes to foreclosure! In 2009, the number grew to 2.82 million, 2 and in 2011 the current trend would appear to indicate that more than 3 million homes will go through the process.3
The problem is not with the people who are trying to buy homes — everyone needs a place to live. The problem is with the structure of money.
Sweating the Way to Equity
The foreclosure crisis left many US cities and towns with whole neighborhoods of empty houses. The economic crisis also left millions of people without jobs — in early 2010, the estimate nationwide in the US was 15 million unemployed, with over 1 million discouraged workers, people who had given up looking for work and so are not counted in that figure.4
The homeless population grows along with it — before the economic crisis of 2008, the National Law Center on Homelessness and Poverty estimated that each year over 3.5 million people, 1.35 million of them children, experienced homelessness. Since that time, accurate statistics are hard to find, but Reuters reported that local and state homeless assistance groups have seen a 61% rise in homelessness since the foreclosure crisis began.5
In response to the foreclosure crisis, the US Department of Housing and Urban Development created a new program — The Neighborhood Stabilization Program (NSP) — that is providing $4 billion to cities and towns.6 The money cannot be used to prevent more foreclosures, but it can be used to buy up foreclosed properties, pay the bank, renovate/repair them and resell them. If public money is being used to purchase private homes from banks, this investment could be used to create new wealth by developing a means of exchange for housing that will create jobs while at the same time moving homeless people back into homes — all without spending more real taxpayer’s dollars.
A model for doing this already exists — Habitat for Humanity routinely requires people to contribute sweat equity as part of their own housing development. Sweat equity could be mobilized on a larger level if the tax dollars are used to buy up groups of homes and sell them to nonprofit community and economic development organizations that provide job and skill training for unemployed workers.
Home renovation involves a wide variety of marketable skills: carpentry, plumbing, electric, renewable energy, HVAC, interior design, gardening, sewing, painting, decorative arts, just to name some of the more obvious ones. Professionals engaged for the renovation could be required to provide skills training for people who need work, and on-the-job experience could be provided with the publicly purchased houses.
The people being trained wouldn’t be eligible for very high wages in conventional dollars — job training programs usually pay a small stipend, if anything — but they could also be paid in supplemental vouchers based on a proportional division of the value of the renovated homes they helped to create. The vouchers could then be used as a down payment on one of the homes or traded with other people for things that the trainees need — forming the basis of a local complementary currency. This currency would not be based on debt (like our current dollars) but rather on the real value of a home. The equity produced by this substantial infusion of tax dollars would therefore be captured by the people who need it most — rather than going to gentrify neighborhoods and displace low-income residents.
Community Land Trusts could play a vital role in this process — by owning the land or other real interests in the housing that tax dollars created, they can insure long-term affordability by having a role in the future resale of the properties.
Saving Our Way Out of Poverty
An improved savings instrument would need to produce long-term value from the original investment and be tangible enough to be readily understood and easily convertible into real goods and services people need. It also should ideally be based on actions that can be taken either in the private sector for individual benefit or in the public sector for public benefit.
Our proposal is to introduce a savings currency that is fully backed by living trees. Their biological growth rate provides for the increased value over time. Trees offer us so many gifts we have come to take for granted. They are the lungs of the planet, inhaling CO2 and exhaling the oxygen we need to breathe. Their fruit and nuts were our earliest and arguably our best food. Their wood has provided us with material for homes, fire for heat and cooking, ship making, electricity, furniture and paper. If you contemplate where humanity would be without trees over the long sweep of history, you can start to see that people and trees have truly been partners all along, although the trees have been silent partners and overexploited ones.
The tree savings system is simple. The key ingredients are land, water and seeds or tree saplings. A local government with underutilized land could make a parcel available to the community for tree planting. The people who do the work and the landowner — a local government or a private citizen — would receive shares in the final product, the trees that would grow over a period of time. The currency unit is simply a share in the value of a forest plantation.
These shares in turn could be either used as an inflation-proof savings account or be exchanged in the local economy for other goods and services — the people who earned them in the first place would not be limited to holding them until maturity. They could be denominated in whatever values would be useful for people, so if the total value of the trees you had planted was worth $1,000 over time from your initial investment of $50 plus the labor of planting and watering them, you could receive the shares in notes of $1, $5, $10 or $100, whatever would be useful for you.
Such tree notes would be based on an obvious value — the trees are very tangible, and ideally they are in the neighborhood where people live, strengthening the incentives to maintain them in good health and to harvest them at a sustainable rate over time.
Not all complementary currencies need to have something physically tangible, like real estate or trees as explained in this chapter. There are other currencies that deal with intangible activities like learning or the arts, as will be shown next.
Reprinted with permission from Creating Wealth by Gwendolyn Hallsmith and Bernard Lietaer and published by New Society Publishers, 2011.